The Marshall Plan Isn’t the Success Story You Think It Is

To this day, the Marshall Plan, that enormous government program for foreign aid and wealth redistribution, is still held up as a model of good government planning, and of the benefits of forcibly redistributing the taxpayers’ money.

In American politics, this opinion has nearly risen to the level of gospel truth. For example, while domestic welfare programs are often met with derision from American conservatives, the Marshall Plan, which is founded on the same ideological foundation as the American welfare states, receives almost universal approval from Americans left and right.

Thus, it is not surprising that politicians and pundits continue to invoke the Marshall plan to push for more modern day programs based on the idea that if governments spread around the wealth, then prosperity will naturally result.

Tuesday in Europe, for example, European Parliament President Antonio Tajani invoked the Marshall plan to push for more EU spending programs in Africa designed to attract wealth there via sweetheart deals between European regimes and African contractors. Many of those firms, of course, are likely to be European-owned. And the scheme is reminiscent of the Marshall Plan. so it’s sure to be a success!

Not coincidentally, Tajani delivered his remarks on the 71st anniversary of Secretary of State George Marshall’s June 5, 1947 speech calling for what became the Marshall Plan. He outlined the plan to flood Europe with government welfare checks in order to help Europe overcome the fact that much of the continent’s capital had been destroyed in World War II.

The money spent totaled over 100 billion dollars in today’s dollars. And given that the American economy was but a small fraction of what it is today, this was an enormous sum.

The rhetoric behind the idea was nothing new. In 1947, it was routine to claim that government spending of the New Deal and World War II had ended the poverty of the Great Depression. That’s not the reality, of course. As economic historian Robert Higgs has shown, the New Deal made the Depression worse . Nor did World War II end the Depression . But at the time, this was a common misperception.

So, if redistributing the wealth worked so well to end poverty in the 1930s, why not do it all again in post-war Europe?

Moreover, it was a winning political strategy for President Truman. As noted by Charles Mee in his book The Marshall Plan:

[Truman needed] some large program that would let him recapture the initiative, something big enough to enable him to gather in all the traditional factions of the Democratic Party and also some middle-of-the-road Republicans, and at the same time, something that would hamper the Republican phalanx.

So, the US government set to work funneling taxpayer dollars to both foreign regimes and to American corporations who could leverage their political influence with foreign regimes to get some of that money.

But here’s the rub. There’s not actually evidence that this worked.

As Thomas Woods notes in this lecture on foreign aid, it’s easy to see why the Marshall Plan has the reputation it does. After all, the Marshall Plan was implemented in the late forties, and during that time, the economies of Western Europe greatly recovered.

But this is a case of mere correlation being woefully insufficient to prove causation.

After all, as Woods further notes:

“Britain received twice as much aid as West Germany did, but economic growth in Britain dramatically lagged behind that of the Germans.”

“France, [West] Germany, and Italy began their economic recoveries before they started getting Marshall Aid.”

“Austria and Greece received a lot of Marshall Aid, per capita, and yet their economic recovery only got under way as Marshall aid was being phased out.”

Woods concludes “given this, I think its increasingly plausible to suggest perhaps the Marshall plan was not responsible for the recovery…what was responsible for the recovery? Well, the return to market economies after the war … there were tremendous wartime economic controls, in all these countries and with the end of the war came the end of those controls.”

And with that came economic prosperity. After all, the German Economic Miracle was based on ending the economic controls of the Nazi-era.

Marshall Plan aid consisted of only a tiny percentage of German GDP. Also, the money that West Germany paid in reparations offset Marshall Plan aid. West Germany received military defense from the U.S. and England, but paid substantial fees for this service. The German Economic Miracle began with a radical program of privatization and deregulation, beginning in 1948. This ended the regulatory controls and elaborate tax system imposed by Hitler and his National Socialists.

Foreign aid had, at best, minimal influence on the West German revival. A free and nondemocratic Germany experienced a strong recovery.

At the same time, in the United Kingdom, politicians were busy at work attempting to continue wartime economic controls into peacetime . Government planning won the war, the thinking went, so why not continue with government controls in order to “win the peace”? Not surprisingly, German economic growth quickly began to outpace British growth where the economy continued to be mired in government planning.

But, given that the UK received more Marshall aid than West Germany, we shouldn’t be surprised that government grew more in the UK. As Woods notes “the way the Marshall plan was set up, for every dollar that you got in Marshall plan assistance, the government of the recipient country had to increase government expenditures by one dollar.”

That is, the Marshall Plan mandated that governments grow in relation to a country’s GDP as a condition of receiving aid.

But, when it comes to real economic recovery, the same principles applied in Europe as applied in the United States. Where we saw large amounts of economic growth after the war — in the United States, for instance — growth was connected to large declines in government spending and the repeal of many government controls from the war years.

Nor is Germany the only example. Mackenzie continues:

Hong Kong rebuilt with minimal governmental interference. This resulted in rapid economic development and a steadily rising standard of living for the people of Hong Kong. This progress benefited not only highly skilled upper income workers, but also low paid unskilled workers.

Japan also experienced great success due to a relative lack of governmental interference. Low taxes and high savings rates translated into strong economic growth in postwar Japan. Once again, foreign aid and intervention were too small to have accounted for this success. Japan did not need massive intervention to recover…

Nevertheless, politicians who speak out against welfare at home sing its praises internationally. George W. Bush, for example, routinely extolled the benefits of the Marshall Plan when calling for ever more foreign aid for Iraq and Afghanistan, which the US had recently bombed into rubble in many areas.

Of course, few would argue that the post-war record in Iraq and Afghanistan is anything to brag about today. And indeed, foreign aid in general — of which the Marshall Plan is the modern progenitor — is no success story.

But that failure isn’t nearly enough to destroy the Marshall Plan myth that endures.

There is, however, another component of the Marshall plan, and that is, as Hal Brands contends today, the necessity of “the deft use of economic tools for geopolitical gain.” That is, the Marshall plan should be seen less as a tool of economic policy, and more as a tool of foreign and geopolitical strategy.

In this respect then, the idea of the Marshall Plan is really to buy loyalty from foreign regimes and to execute public relations upon foreign populations. But there’s a problem here too. Given that the Marshall Plan didn’t actually improve the European economy — and given that the plan required the additional fleecing of the American taxpayer — why not implement a plan to actually helps to both build goodwill and improve economic growth at the same time?

This, of course, could have been achieved by the adoption of unilateral free trade on the part of the Americans. While it’s true that the Marshall Plan was part of a strategy to increase trade among European states, and trade in general, the tools used were the same that we see today: managed trade deals controlled by states and built upon an edifice of international bureaucracy. By necessity, plans like this always involved central planning to the extent that government planners pick winners and losers by designing trade agreements.

Unilateral free trade, however, offered — and still offers — a true laissez-faire solution. Imagine moreover, how the post-war world offered an excellent opportunity in this regard. The Japanese and European economies had been temporarily destroyed by the war. The US, meanwhile, was in an excellent position to offer — through markets — both capital and American consumers to the globe. Faced with free and open access to American markets, and with American firms prepared to invest capital overseas, the US had the chance to build greater cultural and economic ties with its former enemies and longtime allies in both Europe and Asia. The US need not even ask these foreign regimes to reciprocate. Opening up American markets to these foreign regimes would have made sense both geopolitically and economically. It would have offered American consumers access to less expensive goods, while also building new trade opportunity for foreign entrepreneurs. No redistribution schemes were necessary. All that was needed was for the US regime to embrace true, free, and open trade.

Politically speaking, this might even have been an easier sell than usual. Most industrialized foreign economies had been destroyed in the war, and the US was in a position to dominate the global economy. Was it really necessary to protect American markets anymore? The answer is always no, of course, but the case could have possible been made more forcefully at that time than ever before.

Unfortunately, that’s not what happened. Guided by bad economics, and bad ideologies, the US was simply not prepared to embrace true free trade or free economies of any kind. The chosen path was one that afforded governments the chance to continue to control and direct markets, and to decide who gets what and when. That’s always been a pretty hard deal for governments to give up.